Short Sale Investing Basics

April 7th 2008

The short sale follows the maxim that is universal to all forms of investing, the notion to “buy low and sell high.” Granted, this is not always easy to do but when such an opportunity presents itself then the opportunity should be taken advantage of. This is where the concept of a short sale brings great opportunities for those looking to purchase real estate at a low price.

When the seller of a home owes more than what the value of the home actual is worth the seller is facing quite the conundrum. It simply would not make much sense for an individual to continue paying a mortgage that is more than the value of the home. In the absence of a change in their financial circumstances, the homeowner will often allow the bank to foreclose upon the home.

This, of course, creates a conundrum for the bank. Banks are in the business of lending money. Banks are not in the business of selling real estate. As such, the bank may be willing to sell off the house and recoup some of their money as soon as possible. The operative word here is “some.” In other words, the bank may be willing to take less than what is owed on the property. In some cases they may even be willing to take less than the property is worth in order to avoid the foreclosure and sales process. This, in real estate parlance, is what is known as a short sale and it can present a tremendous opportunity for a real estate investor.

Keep in mind, just because the bank is offering the property as part of a short sale does not mean that the bank will be willing to practically give the home away. There may be a need for a little haggling and negotiation for the price you want and don’t be surprised if the bank does not totally give in to your demands. However, do not be disappointed either and simply move on to your next potential acquisition.

Now, some may frown upon capitalizing on a short sale because it would seem as if the investor is taking advantage of the person whose home was foreclosed upon. This is simply not an accurate statement because the buyer in the short sale has absolutely nothing to do with the foreclosure itself. The foreclosure is the result of the borrower not meeting obligations with the lender and the lender acquire the property. In many cases a short sale will include provisions that release the borrower from any further obligation for the difference between what is owed and the price for which the property is sold. Should the bank make the short sale this will also keep a foreclosure off the borrower’s credit report. In essence, a short sale that goes through is typically very beneficial for the borrower.

A short sale has the potential to be great opportunity for acquiring real estate at a bargain price. And, as every wise investor knows, no good opportunity should ever be overlooked because such deals do not present themselves very often.

A.M. Caro is a freelance writer from Southern California.

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Mobile Homes As Investments: One Man’s Trash Is An Investor’s Treasure

April 7th 2008

From time immemorial, trailer and mobile homes have gotten a bad rap. As a New Jersey native, I am well acquainted with the disparaging remarks, many of which inquired into my own residential pedigree. And no, I grew up in a 7-room brick house on an individual lot, which my parents owned for almost two decades. Perhaps those rejoinders had the effect of subconsciously alienating me from the concept of a mobile home as a good investment. Years ago, when I worked on Wall Street, a co-worker, a bank vice president no less, vociferously stated that when he retired he intended to buy a mobile home. I thought he was kidding. Now, I realize, the joke was on me.

Given the dismal state of the U.S. economy, many individuals who suffered in the wake of the sub-prime crisis with ruined credit and the loss of their primary residence, are unwilling to even consider the back-step of living in an apartment. At the same time, though, they recognize that they no longer have the capacity or resources to buy another property. For these individuals, rental of a mobile home is a practical alternative to apartment dwelling.

Some considerations need to be addressed, when determining the viability of buying a trailer or mobile home property for investment purposes.

  1. There is a clear distinction between a mobile home and the land it sits upon. Ideally, an investor should purchase both; you will have considerably less value if you only own the mobile home and not the land, and significantly more control, by owning both.
  2. Just as with regular property, size matters; the bigger the better, both in terms of the mobile home itself and the plot of land on which it sits. Doublewide properties tend to appreciate faster than their singlewide counterpart.
  3. Supply and demand; by focusing on properties for middle and lower income markets, you’ll have a steady stream of people in need of affordable housing. Affordable housing tends to be a scarce resource in any economy, good or bad.
  4. Within a mobile home park, the individual owners pay park fees which may include taxes, insurance and electricity for common areas, advertising for vacancies and maintenance for the road through the park. These vary from park to park, and may be fixed or variable.
  5. Reduced maintenance costs; the home and property are proportionately smaller, requiring proportionately less maintenance and cash outlay. In many instances, even a minimally skilled investor can handle routine maintenance.
  6. Positive cash flow; all things considered (i.e. lower mortgage payments, lower carrying costs, deprecation, etc.) your rental income should more than cover your expenses.
  7. Obsolescence is obsolete; if and when the mobile home itself become outdated or is beyond repair, it can often be upgraded or replaced, quickly and relatively inexpensively. Just make sure you can make back your interest and a tidy profit before the mobile home becomes obsolete.
  8. Variety; an investor is not limited to a trailer that looks as though it was just unlatched from an 18 wheeler. Many have attics, basements, decks, sheds, pantries and multiple bedrooms and baths, just to name a few amenities.
  9. Consider the rules and regulations of the park that your property lies within. Do you have enough control of your own property, or will they be controlling you? The purpose of rules and regulations is to keep out the negative element; an apparent abundance of “park laws” is not necessarily a bad thing.
  10. Affordable housing will always be in demand. Baby boomers and senior citizens alike are demanding alternative housing, for a variety of reasons, including the inherent lower cash outlay and reduced maintenance requirements afforded with buying a mobile home. This bodes well for the mobile home investor as either a good source of steady rental income or an ideal flipping property.

While the information presupposes the purchase of an individual mobile home property or two, don’t hesitate to consider an investment in an entire mobile home park. Warren Buffet, who knows a thing or two about investing, no doubt saw the vast potential when his company, Berkshire Hathaway, acquired Clayton Homes, a nation-wide manufacturer of mobile homes. He’s not the richest man in the world for nothing.

Barb Zigah is a freelance writer covering real estate and business topics.

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Asset Protection: Holding on to your Hard Earned Wealth

April 7th 2008

Many novice real estate investors spend a good deal of time acquiring real estate wealth without any focus on asset protection. That’s a mistake. With too much exposure, you run the risk of having those assets attached in the event a lawsuit judgment doesn’t go in your favor. Landlords are named in more lawsuits than any other class of people. While some of those cases appear frivolous, others are valid. A landlord risks being subjected to judgments, fines, fees and penalties in varying amounts. In a perfect world, the real estate investor will never be sued. Unfortunately, this isn’t a perfect world.

The goal, if I may paraphrase John D. Rockefeller, is for you to “control” your assets, not “own” them. A Certified Public Accountant will have a whole-host of asset protection strategies to draw upon. Below are some of the protective strategies:

Insurance
This is simple basic protection; an umbrella policy is generally used by investors who have a sizable number of unencumbered assets with a good deal of equity, to ensure that any claim, including catastrophic ones, will not place those assets at risk.

S or C-Corporations and Limited Liability Companies (LLCs)
By law, the “owners” or shareholders of either an S or C-Corporation, or the “members” of an LLC are not legally responsible personally for the actions of the business; the only exception to this law is that of outright fraud. Even if an investor is the sole shareholder/member, he is not personally liable for losses or judgments against the corporation or the limited liability company.

Land Trusts
A land trust is merely a document that “conceals” the investor’s name on the property title as listed in the public records. It is a simple document to create and can be done by any real estate attorney, and is relatively inexpensive. While the land trust does have tax implications, namely because trusts are often taxed at a higher tax rate, its overall benefit is the privacy of ownership. In most cases this privacy of ownership can be quickly negated by a title search, which will reveal the ownership before the land trust transfer.

Revocable Trusts
A revocable trust is an agreement, in which control of assets is transferred from an owner to a designated trustee. Because an investor is permitted a good deal of flexibility, there are often changes to the asset composition, or appointment of a new trustee, if the investor is not satisfied with the trustee’s administration.

Irrevocable Trusts
An irrevocable trust can never be altered or canceled, in any way shape or form. Period. It is the ultimate in asset protection, because you are in effect, placing your assets beyond your reach. Because of the irrevocability of it, an investor must be one hundred percent certain of the capability and trustworthiness of the Trustee. In effect, they now control the asset, not the investor.

Watertight or “Bulletproof” Protection
This is a strategy whereby, with the assistance of a capable lawyer, you create a layered wealth protection strategy, which will shield your assets from seizure. Effectively, you build layer upon layer of single strategies, which throw up “legal” roadblocks to litigation activities. The foundation is typically the creation of a land trust, which is combined with one of the limited liability companies. The possibilities are almost endless.

These are very simplistic explanations of the various forms of wealth protection, and an investor would be wise to consult with an attorney or CPA for further advice. The bottom line is that an investor would do well to consider one or more forms of asset protection to safeguard their real estate wealth. One lawsuit can ruin a lifetime of wealth building.

Barb Zigah is a freelance writer covering real estate and business topics.

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Home Inspections: Protecting Your Investment

April 7th 2008

Home Inspections should be a very critical piece of any investors due diligence process. Due diligence is an important concept that anyone interested in real estate investing needs to commit to memory. The most logical example of due diligence would be to compare the sales price of a home to the sale price of similar homes in the surrounding area. If a house’s asking price is $250,000 and similar homes are going for $180,000 then a number of questions need to be asked regarding the true value of a home. This type of due diligence is very common and often not overlooked. Home inspections, on the other hand, are often considered as optional for some investors… at their own peril!

Home inspections should be undertaken on each and every property, lest an investor finds his or her plans for the property will built on shaky ground. Costs for necessary improvements to the property should always be considered by investors before deciding to purchase a property and at what price. Home inspections are primarily for the purpose of sniffing out some of these potential problems. For example, the home could be infested with termites, have a leaky roof or need to have its malfunctioning siding replaced. Had you purchased the home without discovering these defects, you would have overpaid relative to your cost/benefit analysis.

These problems can be avoided up front by paying for a home inspection. Home inspectors will examine the property, note the flaws and provide advice on steps that can be taken to correct the flaws. Good home inspectors should even be able to give you ballpark estimations for replacing and repair costs. Clearly, no one would want to make an investment without full understanding and disclosure of what the investment entails. So, the question remains why would anyone enter into a real estate investment undertaking a home inspection?

Finding a reliable home inspector is not as difficult as some would assume. There are a number of professional home inspectors who work in cities all over the United States. It is best to select one who is properly licensed and has significant experience in the field. This is not to say that someone with limited experience can’t do a good job. There are many builders or contractors turned home inspector that are able to translate their prior work experience directly to the art of home inspection. Since most home inspectors cost about the same amount, you would do well to find one with lots of experience and excellent referrals.

It will be critical to make sure the home inspector has complete and total access to the home and is given a reasonable amount of time to inspect the home without distractions. Keep in mind, the home inspector is basically safeguarding your potential investment and you want to make sure they do a proper job without interference.

The ultimate purpose of home inspection for an investor is to ascertain the true value of a home, including any necessary improvements. If it’s true that you make your money when you buy a home, then a home inspection should be mandatory.

A.M. Caro is a freelance writer from Southern California.

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Real Estate Investment Seminars

April 7th 2008

Real estate investment seminars can provide investors with vital knowledge. To say knowledge is power is a dramatic understatement. Knowledge is more than just power; it is a tool for action. Case in point, someone who knows little about real estate investing is clearly not going to be as successful as someone who has developed a great deal of knowledge on the subject. Of course, this brings about the question as how one can increase his or her knowledge about the subject. One of the best ways to learn more about the subject would be to invest (pardon the pun) a little time examining one of the many real estate investment seminars designed to boost one’s knowledge, skill and opportunity in the real estate world.

In the past, if a real estate investment seminar was not coming to your area you either had to travel to the seminar location or you were just flat out of luck. Thankfully, that is not the case today as many seminars are available on DVD, CD and even in downloadable form on the internet. So, if you are looking to increase your real estate investing knowledge there are a number of resources available to you.

Now, there are those who are skeptical in regards to the true value of these seminars. After all, do they not make bold claims that are hard to make a reality? Well, it depends on the focus of the seminar. It is true that there are a number of seminar hosts who make absurd and bold claims but then there are those who offer solid, reliable information and advice that can truly prove helpful. The key to getting the most out of these seminars is to know what material is valuable and what material is hyperbole. For more insight read an article from NuWire Investor called: Real Estate Investment Seminars: The Good, the bad, and the ugly.

Investors should make sure to judge the credibility of the material, if the goal of the seminar is to “make millions of dollars in one month with little or no money down,” then you are probably not receiving much in terms of functional information. These types of over the top seminars are designed to appeal to the inherent laziness in which some in the “infomercial audience” revel. While these over the top seminars can be entertaining they are not good values for obtaining your education.

Conversely, those seminars that deal with topics such as “the basics of real estate investing,” “how property taxes affect investments,” etc can be valuable and helpful. The reason is that they are based on simple and practical information necessary for successful investing. The subject matter is down to earth and real and not prone to excess. Obviously, that is a good thing.

Yes, you can gain a lot of valuable information from a real estate investment seminar provided the seminar is not one that is weighted down with gimmicks and absurd promises. But, those real estate investment seminars that provide simple, basic information will prove quite helpful. Yes, it can be said that with real estate investing less is more.

A.M. Caro is a freelance writer from Southern California.

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Real Estate Investing: Value Over Time

April 7th 2008

Investing is often a product of the times, and real estate investing certainly falls into that category. In the past, domestic oil drilling was a huge source of investment windfall profits. In today’s day and age, domestic oil drilling is not what it once was and those who invest in oil drilling rarely see huge profits. Yes, there are exceptions but that is the common occurrence. Oil, however, is a speculative investment and it is somewhat understandable that there are significant risks involved. Real estate investing can be far more conservative an approach to investing since it seeks to gain a value of equity over time and can include fairly stable cash flow. This safe approach is what attracts many people to real estate. Then again, huge potential profits attract people as well, but for most the safety of a secure investment over an extended period of time is what catches many people’s eyes.

Of course, there are a number of short term real estate investment success stories. During periods of real estate growth it was not uncommon to see properties appreciate 20% in one year. Those who sold their properties during such boom periods ended up making a ton of cash. And, yes, it would be intellectually dishonest not to mention that there have also been periods of time where people have invested in real estate and suffered losses due to depreciation. That is the nature of real estate investing: values goes up and down.

This brings about an important point and that is that probably the best way to make the most out of a real estate investing is to stick with it for the long haul. In other words, over an extended period of time the ups and downs of the market may average out to a figure that is in your best interest. For example, some years may yield 14% growth and others may yield -2% growths. The average of the two over time is 6% growth, not a bad return on an investment considering that some years saw depreciation of the property value. Also, it’s possible that positive cash flow may contribute to making that return even higher.

In a way, the odds of a successful real estate investment lie with staying with the property over time. Markets will go up and they will go down and if you ride the down cycles you may find yourself in a good position eventually. Now, this is not to make light of situations were the bottom falls out or one is paying more on a mortgage than what a property is worth. Instead, it is to point out the conservative nature of a real estate investment and how time can often be an asset.

Then again, there also comes a time when one has to realize that a property value will never increase. If a neighborhood is suffering from declining real estate value year after year because of local job loss and depopulation, it may be smart to sell off the property before its true depreciation gets out of control.

Ultimately, unless one is in such a situation where a geographic location has become economically depressed and depopulated, such as Detroit, there is usually opportunity to weather the storm. If you purchased a property with the right fundamentals, time will be your friend.

A.M. Caro is a freelance writer from Southern California.

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Tenant Lease Agreements: Straight Leases vs. Graduated Leases

April 7th 2008

Tenant lease agreements are something that most real estate investors have to deal with at some point. After all when it comes to real estate investing, one of the most common means of earning a return on an investment is to rent out a property. This is a simple concept that is quite easy to follow. If your mortgage on the property is $1200 a month and you are renting the property out for $1500 a month, then you are already pocketing $300/month. When you take into consideration that the value of the rented property is appreciating you are really the beneficiary of a good deal. In fact, if you are able to pay off the mortgage and are still collecting rental income then the investment is even more profitable.

But, there needs to be some safeguard in place. You simply can not let someone rent the property and move out whenever they feel like it. Nor can you risk renting to someone without agreeing in writing that they are responsible for any damages to the property. Rentals should never work on a handshake deal. Handshakes don’t hold up in court.

This is why a tenant lease agreement is critical. It spells out not only the agreed upon rental amount, but also clearly details the terms and conditions of the rental agreement. Without a lease there is the potential for various gaps of time when no one is occupying the property and no rental income is generated. Needless to say, this can undermine a real estate investment and is not recommended.

Not all tenant lease agreements, however, are created equal. When it comes to drawing income from a residential or commercial property, it is critical to have the proper lease in place. This will maximize your potential return (through consistent and stable rent) and protect your assets. Remember, you are placing the care of your equity in the hands of a third party. You will want to make sure that all the bases are properly covered. From this you must decide whether to use a straight lease or a graduated lease.

Straight Leases
Most people are familiar with the straight lease. It is the lease agreement most commonly used. A straight lease used a fixed monetary amount for the lease payment over a fixed period of time. A common example would be renting out an apartment for a fixed rate of $600 a month for a 12 month period. A graduated lease, on the other hand, provides a clause where the landlord can raise (or lower) the rent either at will or within the confines of certain specific conditions.

Graduated Leases
Often due to a lack of foresight, real estate investors will sign tenants to a straight lease agreement without thinking of potential problems in the future. Case in point, the local property taxes may be raised unexpectedly and the ability to raise the rent on a lease an extra $50 a month could prove beneficial. With a straight lease agreement this would not be possible and the increased property taxes would have a negative effect on the cash flow of the property.

Opting for a graduated lease agreement vs. a straight lease agreement will be based on a number of factors and conditions. The bottom line, however, is that you need to carefully weigh your options so as to arrive at the right lease agreement for your needs.

A.M. Caro is a freelance writer from Southern California.

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Wholesaling Properties: Buying And Selling Real Estate In Bulk

April 4th 2008

Wholesaling properties is for those real estate investors who like to think big…real big. In other words, while some are content with buying a home and selling it at a profit there are those who possess grand ideas of purchasing homes – as in the plural form of the word home – and sell those homes in bulk at huge profits. Then again, the employment of the word homes is not entirely accurate as this form of bulk selling often known as wholesaling can be performed with any number of commercial or residential properties.

Granted, this is not the type of real estate investing that can be employed by an individual with limited capital. The ability to purchase 10 or 15 properties within a year really can only be employed by someone who possesses significant wealth. But, if one is looking to somewhat safely make huge money of a series of low profit quantified flipping then real estate wholesaling may prove to be a wise move.

There are a number of ways one can go about wholesaling property. The obvious would be to purchase various properties individually over time. While this is cumbersome and time consuming it will have its rewards if the equity investment pays off in the end. Then, there is a much easier method of purchasing bulks of property and it can come in the form of purchasing various properties from a bank. This occurs when a bank has foreclosed upon or acquired a number of properties and is selling them. A wholesaling investor could make a bulk offer on the collective properties and then flip them all at a profit at a later date.

In a way, this type of investment could see a number of small profits quantified into a huge collective sum. That is to say, if you were to make a $10,000 equity profit on 15 homes the collective profit would be $150,000. Of course, that is a very conservative estimate as the profits could be even more significant. Then again, if there is a severe economic downturn in the market the potential to lose significant income is possible. As such, it would be safe to say that this type of investing is not for everyone.

However, if you do have the resources for such an investment strategy it could prove to be significantly rewarding. After all, if you can afford it and are willing to take the risk why not go for it? Yes, you could pursue smaller, more limited real estate investing options with smaller yields but when there are such greater opportunities available.

Ultimately, it is best to start small with wholesaling properties (say, three properties at a time) and then building upon it as you gain experience and earn a few initial profits. However, the end result could be a huge windfall which can make all the efforts worth it in the end. Clearly, that makes wholesaling properties a very attractive proposition to those with the resources to do it.

A.M. Caro is a freelance writer from Southern California.

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Foreclosure Auctions: Still Opportunity?

April 4th 2008

Foreclosure auctions allow investors the potential to buy properties at a huge discount. Anyone who even glances at network and cable news programming is aware of the current foreclosure crisis in the United States. For those not entirely familiar with the situation, essentially what has happened is many millions of individuals have been unable to meet the terms of the variable rate mortgages and have seen banks foreclose on their property. Of course, the bank needs to recoup the money that it has lent out and then means it must auction off the home that was foreclosed upon. This can create an opportunity for an individual looking to acquire property at a reduced cost as foreclosure auctions can provide a number of excellent deals.

Now, some may be wondering what value there is in purchasing a home for investment purposes during a foreclosure in a time period when real estate values are diminishing. This is a valid question and there are a number of legitimate answers to the question that may put concerns at ease. First, the real estate market will have its ups and downs. During an up cycle many people jumped on the real estate bandwagon since the value of property was increasing upwards of 7% a year meaning that the equity of the home would be worth far more than the mortgage. Unfortunately, as real estate values declined many people who were unable to make their mortgage payments could not refinance their high interest loans and could not afford to wait it out until the next up cycle so they allowed foreclosures to process.

It is important to note, however, that if you purchase the home at a low rate and the bottom is no longer falling out on real estate property values then you will not run a significant risk of losing out on the investment. Yes, there is risk with any investment (something many of the subprime borrowers should have realized) but the market has its ups and downs and it is only a matter of time before the equity on homes will eventually appreciate. As such, being able to purchase a home at a “rock bottom” price brings with it many rewards and incentives.

Keep in mind, the bank is mainly trying to recoup the remaining balance on the mortgage and may be willing to sell the home on the auction block for less than its full market value. Remember, the bank has been paid some of the money it previously lent back so it would not lose much money if it let the home go for less than its market value. No, you will not purchase a million dollar home for $50,000 like some obtuse infomercials claim but you may find yourself acquiring a 15% or more discount on the home. This makes the equity investment immediately profitable and also makes foreclosure auctions very attractive propositions.

Once again, there are ups and downs in the real estate world and the current down cycle has created a tremendous opportunity for those looking for great deals via foreclosure auctions. As such, foreclosure auctions remain a valuable service for any looking to expand their real estate investing interests.

A.M. Caro is a freelance writer from Southern California.

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Sandwich Lease: Lease Option Investing With Little To No Money Out Of Pocket

April 4th 2008

The sandwich lease allows real estate investors to control a property with little to no money out of pocket. Investing in real estate is much more multifaceted than most are led to believe. While many novices understand the concept of equity investing they do not understand many of the other real estate investment options that are available. In fact, when one looks at the huge world of real estate investing it is somewhat surprising how many options are available to those looking to earn significant income in the real estate market. Yes, some of these investment strategies are a bit involved, but they are not complex. Such is the case with the “sandwich lease” investment strategy which involves subletting a lease while maintaining an agreement to purchase the property.

While this sounds a little complex it reveals itself to be actually quite simple when all the steps are broken down. The first step involves leasing a property with an option to buy. There are a number of ways this can work but here is one of the most common examples: you sign an agreement with a landlord to lease a property for five years at $2,000 a month rent with an option to purchase the property anytime during the five year lease for the current value of $300,000. If the property appreciates, you can capture that appreciation by exercising the option at $300,000.

With a sandwich lease another phase is added as the leaseholder rents the property out to a third party at a profit. That is, the lease hold is responsible for $2,000 a month rental payments but turns around and leases the property for $2,300. The leaseholder may even negotiate a higher priced option with the third party. In that case, should the third party exercise the option, the leaseholder would net the difference between the two sales prices.

Of course, there are potential problems that may develop and many of these problems may center on the third party to whom the property is leased. For example, if you are the leaseholder you will be responsible for any damages incurred by the individual to whom you have subcontracted the lease. If the third party damages the home it may depreciate in value. If they do not compensatie you for the damage you will be the one who is stuck paying the bills. This is the most common risk inherent with dealing with renters. Then again, there are also the potential problems of the third part not paying their rent, etc. This is especially risky with a sublease because you would still be responsible for making your lease payment even if the sublease tenant does not pay their rent.

While this is a generally simple concept for real estate investing it can become quite problematic under certain circumstances. So, never look at this type of investment – or any investment for that matter – as a sure thing. It is always a good idea to have an attorney review your contracts to help protect you as much as possible.

Under the right circumstances using a sandwich lease offers an opportunity to control a lot of real estate without needing a lot of upfront cash. Aggressive investors interested in leveraging their time, effort and energy (instead of cash) to profit in real estate, may well find that sandwich leasing is a desirable investment strategy.

A.M. Caro is a freelance writer from Southern California.

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